German Budget Austerity Requirements Divide EU Summit

The Germans are planning to put forward a plan to change guidelines to the stability and growth pact (SGP) to give it more teeth. The sense in Berlin is that the SGP, which limits budget deficits to 3% and debt-to-GDP to 60%, has been a bust as flouting of the SGP has been widespread. I see this as a misguided political manoeuvre. In truth, however, it was the Germans and the French who broke SGP terms last decade giving the green light to all comers. Moreover, the Spanish and the Irish never broke stability and growth pact guidelines once in the run-up to the financial crisis. So, clearly the problems in the euro zone have nothing to do with deficits or the stability and growth pact.

This fetishism by the Germans threatens to divide Europe. A number of countries, including some of the more ‘fiscally responsible’ have come out against the German plan. The Swedish daily Dagens Nyheter reports that the Swedish government under Fredrik Reinfeldt is very much against the plan as are other governments within the EU.

My translation is below:

When EU leaders arrive in Brussels on Thursday, they will have one thought in mind: must we already change the union’s rules with the Treaty of Lisbon barely one year old? This was tussled over for years and everyone pledged not to tinker with it for many, many years.

But now German Chancellor Angela Merkel, supported by France, calls for treaty changes. Without them, she does not believe that she will manage to get a constitutional court or parliament at home to create a permanent emergency fund in place of the temporary one that was created when the euro crisis raged worst in the spring. A future safety net is needed, but as the Treaty now stands, it risks violating the clause which Germany insisted on when the euro started, that no eurozone country can expect to be rescued by the other euro countries in times of crisis.

In other words, Germany will not have to pay the bill when well-known budgetary sinners crash.

Now Fredrik Reinfeldt and his colleagues faced with the choice of refusing amendments to the Treaty because it will be painful, time consuming and unpredictable, or doing what Merkel wants to secure German participation in future rescue funds.

So far, many appear willing to bargain with Merkel, but her requirements are more difficult to digest.

She wants euro area countries that mismanage their economy to lose voting rights in the Union. Such a treaty change involves a shift of power that is likely to lead to demands for a referendum, which gives EU leaders unpleasant memories from when the previous proposal for a new constitution was voted down in the Netherlands, France and Ireland.

This is unworkable and it will be interesting to see what kind of conclusion is reached. Sweden is not a party to the euro zone but has a say in how intra-EU funds are used to support euro zone members. The same is true for the British or the Danes, neither of which show any inclination for joining the euro zone as do the eastern European EU countries. This sets up a tension because the requirements Merkel wants to set forth are really about intra-euro zone external imbalances and have nothing to do with Sweden, the UK or Denmark. They should have little interest in submitting yet another EU treaty to their citizens for a vote.

It’s the currency and the euro zone’s setup, not the stability and growth pact or the budgets. The route that the EU is now going would take years to complete in any event – and we are still in crisis mode despite what policy makers would have us believe.